The recession might be over, but the pain continues

Unemployment is at 8.6 per cent and the U.S. is still in trouble

It's official, the recession's over. The Bank of Canada says so, and expects economic growth to resume in this quarter after only three quarters of negative growth, just one quarter more than technically required to qualify as a recession.

Being a Canadian central bank, it is cautious in its outlook. "There are still risks to the recovery," says Bank of Canada Governor Mark Carney. He also feels your pain, and suggests that part of the recession isn't over.

This recession has been shorter but steeper than the last two, from 1990-92 and 1981-82. The 1990s recession lasted eight quarters, two full years. The 1981-82 downturn lasted six quarters, a year and a half. The current recession will have lasted only three quarters, but the havoc it wreaked on the global economy is still being measured in seismic aftershocks from the sharpest downturn since the Second World War.

It brings to mind Ronald Reagan's definition of a downturn when he was running for the U.S. presidency against Jimmy Carter in 1980. "A recession," he famously said, "is when your neighbour loses his job. A depression is when you lose yours." And a recovery, he added, would be when Carter lost his. So what happened? Reagan's trickle-down economics of tax cuts and higher spending failed to stop what was then the steepest downturn since the 1930s in his first year as president.

This time the economic rebound is partly a renewal of consumer confidence, at least in Canada, and largely the result of co-ordinated actions of G20 governments and their central banks, flooding markets with cheap liquidity. The pump-priming of the economy is unprecedented on a global scale. We've never before been in such a daunting economic moment. As Carney was quick to add about a guarded outlook: "The point we really want to understand is that recovery is the product of policy and where policy is."

Well, monetary and fiscal policy - lots of liquidity and lots of deficit spending, have apparently done their jobs, may Keynes be praised. And at some point pent-up demand is going to kick in.

Which isn't to say the pain is gone. In Canada, unemployment has risen from six per cent a year ago to 8.6 per cent today. Since the beginning of the recession in the third quarter last year, the Canadian economy has lost 370,000 jobs.

The good news is that things are even worse in the United States, where twice as many jobs have been lost on a per capita basis, 6.5 million, taking unemployment to a scary 9.5 per cent, wiping out all the job gains of the previous economic cycle. T he United States is our largest customer. In the U.S., the savings rate has moved from negative territory to nearly seven per cent, which suggests that while demand might be pent up, Americans aren't spending yet with the same confidence as Canadians.

Some of the other trailing indicators are a bit misleading. For example, Canada's inflation rate entered negative territory at minus 0.3 per cent in June, but one month doesn't mean deflation. In fact, if you exclude the cost of energy, which has fallen sharply, the consumer price index actually rose 2.1 per cent in June. Go figure. Only in economics would the cost of living go up if you didn't drive your car or heat your home.

And then another factor in Carney's guarded outlook is the loonie, which has rallied sharply to 92 cents U.S. twice this year, once in May and again this past week. Which is good for Canadians going on vacation in Maine, but not for manufacturers exporting to the U.S.

The last time the Canadian dollar spiked, Carney took the unusual step of talking it down, and it promptly fell to the mid-80s. This time, Carney warned about the flight of the loonie being a threat to our "nascent recovery."

It's pretty remarkable for a central banker to be talking down his own currency, but Carney's obvious concern, other than an export-driven economy, is to warn off speculators, the kids in red suspenders.

And yet part of the loonie's resilience is a reflection of Canada's strong fiscal fundamentals, especially compared to the U.S. - our two per cent current deficit as a share of GDP compared to their 13 per cent. There's also our abundance of commodities, such as oil and gas, which the world wants. Our dollar is petro-currency, and closely tracks the world price of oil, which has doubled from a $33 low early in the year to the mid-60s last week.

Carney needs to be careful about this. It's one thing to rein in speculators. It's another to be seen as poor-mouthing.